Monday, January 31, 2011

Why Italy Needs Berlusconi, part 2

So much for the electoral logic. But surely people vote with their pocketbooks, and a failing economy should lead to governments being turfed out. So why does Berlusconi survive, despite scant evidence that his policies have done anything to improve Italy's declining economic performance?

This is indeed a tricky one. It would be foolish to blame Berlusconi for Italy's economic problems, although his record is pretty terrible. Berlusconi entered the political arena in 1994, winning office immediately, although his government was quickly overturned, with various centre-left administrations taking over from 1995-2001. However, since 2001 Berlusconi has been in power for all but 18 months, and with a comfortable governing majority for most of this time. So since 1995 Berlusconi has been Prime Minister for 8 out of a possible 15 years. How has Italy done in this period? The answer is revealed in this neat chart from the US Bureau of Labor Statistics (via Paul Krugman):

Italy has the lowest growth rate of any major economy over this period, even worse than deflation-ridden Japan. Why, and what has it got to do with Berlusconi?

Here we need to look a bit deeper into Italy's economic and social institutions. At the risk of falling into the standard narrative about Italy's problems, the Italian economy needs reform. It has 1) an inefficient bureaucracy, 2) an impenetrable legal and regulatory system, 3) endemic corruption (in part a result of 2)) and tax evasion, 4) a failing education and skills system, 5) a failing worker representation and wage bargaining system, 6) an ill-designed welfare state, 7) a heavy burden of public debt, 8) large parts of the country in the hands of criminal gangs and locked in a cycle of stagnation and social decay.

Given these problems, it's actually slightly miraculous that Italy is doing as well as it is. But there is no way Italy can grow again without doing something about these issues. And here's the rub: Berlusconi's political support rests in large part precisely on the guarantees he offers that few of any of these reforms will ever be introduced. He could do something about 1), since public sector workers tend to vote for the centre-left, and he could do something about 5), since unionized workers, the main losers from reforms, also lean left. He has shown some interest in education reform (4), but most changes have involved simply cutting funding (or favouring subsidized church schools).

But in every other compartment, reforms run up again entrenched interests which in many cases vote for the centre-right. Berlusconi stands opposed to substantial deregulation (most deregulatory measures recently have been introduced by the centre-left), he opposes any serious measures to combat corruption, he opposes more stringent tax collection and therefore debt reduction, he has reached a fairly stable accommodation with southern mafias, and he has shown no signs of addressing the iniquities of the welfare system, which spends most of its money on pensions and offers little protection to the most vulnerable social groups.

In the end, Italy is locked in an impasse which produces stable, resigned decline. Reforms that might increase efficiency and productivity cannot be introduced because the affected groups are either too politically powerful, or too exposed to huge social risks that the welfare state cannot absorb. As Matthew Iglesias reminds us here, progress is often destructive, and new ways of producing things more efficiently cause real harm to people, hence the need for redistributive institutions to allow societies to embrace change rapidly and at the lowest social cost.

Italy's economy is stuck in a lousy equilibrium, and it has neither the institutions nor the political leadership required to dig it out. As long as the decline is gradual, things could stay the same for years - in fact, despite the appearance of chaos, the dominant tone of Italian politics and society over the past two decades has in fact been stability, even stasis. But if it were to suddenly accelerate, I'm not sure whether Berlusconi or anyone else would be able to hold it together.